Arkansas-based Stephens Group likens itself to a $1 billion private equity firm, but with a crucial difference: it is a family office with long-term capital.

Stephens Group was formed in 2006 when Witt Stephens and his sister Elizabeth Campbell sold their interests in the investment bank Stephens, founded by their father in 1933.

People think the family accumulated its wealth via oil and gas and financial services interests, but the bulk of its permanent capital came from buying and investing in almost 200 businesses, according to managing director Clay Hunter.

Clay Hunter

That experience is key to Stephens Group’s philosophy.

“There’s a difference between investing in a few businesses and being in the business of investing,” said Hunter, who joined in 2015 from Harbour Group, a St Louis-based private equity firm.

“We understand the tempo and pace of the business of investing and what it takes to build the required team.”

Since 2006, Stephens has invested $1 billion in around 30 platform companies and numerous add-on acquisitions, focusing on the lower mid-market.

Like a $1 billion private equity firm, Stephens places an emphasis on a constant sourcing effort, full transaction capability, incentivising the team and pattern recognition.  These private equity-style competencies are “not inconsequential”, according to Hunter.

It is building out its 14-strong investment team, looking to hire four or five professionals across portfolio value creation, business development and junior investment professional roles.

However, unlike many private equity firms, Stephens does not plan to have an operations bench.

“We don’t have hired guns and are not looking to replace management,” Hunter said.

Instead, the firm engages with industry professionals, bringing them on as consultants or board members to help the companies. It recently hired a full-time operating executive to streamline this process, Hunter said.

Importantly, Stephens retains the advantages of a family office: operating without the limitations of the private equity model. This means it can hold companies for longer, and has no limited partners to report to.

Another advantage: no investment schedule means Stephens has flexibility in deploying capital and can wait for the best opportunities.

“Intellectually, I understood the flexibility, but until you have experienced full flexibility, you don’t appreciate the true value of it,” Hunter said.

Investment strategy

Stephens invests up to $125 million in buyout transactions and up to $30 million in growth equity across three sectors: commercial and industrial products, especially speciality distribution and engineered products; food and consumer products, with a growing effort around ingredients and other B2B products; and software and tech-enabled services such as data centres, towers, fibre and cybersecurity.

It also invests opportunistically in other sectors. For instance, during the global financial crisis, Stephens invested in Bear State Financial and BrandBank.

“Those came to us because of relationships and because we understood the space from prior experience,” said managing director Aaron Clark.

Aaron Clark

Several portfolio companies have been held far beyond a private equity fund’s typical three- to six-year hold period. For instance, Stephens Group has been an investor in steel fabricator Spitzer Industries since 2007, and in engineering company Summit Industrial since 2011.

The group recently exited its investments in Kodiak Gas Services and BrandBank that it held for eight and seven years, respectively.

When it comes to sourcing transactions, Stephens prefers “a really wide funnel” of potential investments, but looks to “cut it down pretty fast”, Hunter said.

In any given year, Stephens Group comes across between 900 and 1,100 deals. Of these, the team spends several hours on about 350. Senior management then spends the same amount of time on about 100.

“We will try to review many opportunities in depth, then get in front of 30 or so management teams, and bring it down to more granularity with 10 to 12 of those opportunities,” Clark said.

Stephens makes firm offers on three or four, and finally invests in one or two of those deals.

Stephens has no set investment pacing plan. In the last two years, it has added two new platform investments, completed two follow-on acquisitions and helped manage five liquidity events.

The firm does not invest in private equity funds, but co-invests with independent sponsors, private equity firms and other family offices.

For instance, a recent co-investment opportunity came through a family office that was looking to invest in a business requiring a capital infusion of $50 million; that family was comfortable with investing up to $10 million, and Stephens was evaluating stepping in with the rest, Hunter said.